Political Uncertainty, Economic Stability

José Moisés Martín

5 mins - 5 de Agosto de 2023, 07:00

July’s election result leaves the governability of our country on hold until the necessary agreements are reached to form a new government. Everything indicates that, barring any surprises, we will see at least three votes, two corresponding to an eventual failed investiture of Alberto Núñez Feijoo, and, depending on the progress of Sánchez’s negotiations with the rest of the parties that could form his majority, a new attempt during the autumn months. If neither of the two satisfactory results are achieved, new elections would have to be called after the deadline has passed, and courts would have to be formed again and the process repeated, in the hope that on the second occasion - this is the third time Spain has had to repeat elections since 2015 - the new cards awarded by the public will allow the contenders to make better moves.

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Meanwhile, the world continues to move forward, and the Spanish economy continues on its course. The risk of instability that is announced in situations like this does not seem, for the moment, to affect our economy: the stock market is at similar levels to those existing before the campaign - after reaching its annual high on 27 July, and the risk premium remains fairly stable at slightly over 100 points, basically the same figures it has offered throughout 2022 and 2023. It does not seem therefore that the markets are discounting strong instabilities in our country. Nor does the experience of other periods of uncertainty suggest that Spain is at risk of economic instability in the short term: in 2016, when the first repeat election took place, the risk premium fluctuated with a very similar profile to the one it maintained in 2017, although the stock market lost, over the course of that year, 1000 points. In 2019, once again, with two elections, the figures offer little reason for concern: the stock market remained little changed throughout the year, and the risk premium actually fell throughout the period of the incumbent government. All in all, the markets most sensitive to instability did not, on balance, offer much reason for concern. For such short-term movements in an integrated Eurozone economy, the European Central Bank’s actions are far more relevant than any other consideration.

The resilience of the Spanish economy to the global economic situation also adds value: with record employment and expected economic growth above 2%, and with inflation among the lowest in the Eurozone, Spain is navigating relatively well through the turbulent waters of the crisis generated by the war in Ukraine. So, so far, we can speak of a certain tranquillity. But this scenario may not last long.

The July employment data, although positive, point to a sharp slowdown in job creation, and growth in the second quarter indicates that the economy is starting to slow down. Data from industry are not positive, and the external sector, which had been the engine of economic growth in recent quarters, has ceased to contribute in this latest period. Inflation, which reached a low in June, may rise again in the remainder of the year, dragged down by the base effect of the year-on-year rates, and employment, as it approaches our structural unemployment rate, will slow down its capacity to create new jobs. In other words, the repeat election may take place in an economic context that is not as favourable as the one we had in the first contest. And although the government is in office, these data will undoubtedly be thrown in its face as a sign of its economic management.

A downturn may not be a problem if Spain remains committed to a strong reform drive, through structural measures aimed at improving long-term economic growth and social cohesion, as set out in the EU-funded Recovery Plan. But to implement these reforms requires a government capable of acting with full powers, not an acting government that can only attend to the ordinary tasks of the administration. So if we want to keep up the pace of reforms and investments foreseen in the plan - which, let us remember, ends in 2026 - it would be necessary to have a fully functioning government and parliament the sooner the better.

In conclusion, the situation of political uncertainty does not seem to affect, at least in the short term, the economic and financial stability of our country, but both the economic data pointing to a slowdown and the need to continue deepening the investment and reform programmes would invite us to speed up negotiations to form a government. Of course, this process does not necessarily depend unequivocally on the economic situation, but it is undoubtedly a factor that could have an impact on an eventual electoral repetition. If it depended on the economy, the incentives to form a government quickly would be a powerful factor in speeding up negotiations.
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